Europe higher, downgrades curb gains

EADS, Vivendi, Deutsche Boerse downgraded

By

SarahTurner

LONDON (CBS.MW) - European shares held onto gains Monday, after U.S. shares opened higher, but gains were capped by Deutsche Boerse, which is seeking to buy the London Stock Exchange in a $2.6 billion deal.

The benchmark German DAX Xetra 30 index (1876534) climbed 1 percent at 4,219, and the French CAC 40 index (1804546) also added 1 percent at 3,806.

U.S. stocks rose Monday as investors cheered a better-than-expected month for retailers in November, with a flurry of deals including Oracle nailing down its acquisition of PeopleSoft lending further support.

Oil futures were steady, with January dated contracts priced at $40.55, while the euro was at $1.33 against the dollar.

Deutsche Boerse (581005) shares dropped 3.6 percent after the London Stock Exchange (LSE) rejected the approach from its German rival. The Boerse's proposed offer set a 23 percent premium to the LSE's close on Friday.

The Boerse said it accepted an invitation for further talks "to demonstrate to the London Stock Exchange the full benefits of its proposal and its belief that such proposal can be successfully implemented."

Merrill Lynch downgraded Deutsche Boerse (581005) to neutral from buy, saying the proposed offer "seems like a full one, especially as customers may well use the proposed merger to negotiate further price reductions."

Merrill said it doesn't expect a bidding war to develop given the scale of the initial bid. Yet the broker said it sees a risk that the Boerse will overpay for the LSE, and that "significant management time will be taken up with the bid."

Bear Stearns also downgraded Deutsche Boerse to underperform from outperform, following the Boerse's $2.6 billion proposed offer for the London Stock Exchange, saying "while we understand the rationale of the proposed deal, we believe the price is excessive."

Broker comment impacts

Meanwhile, European Aeronautic Defense & Space Co. (EADS) (005730) shares were 4 percent lower after Goldman Sachs downgraded the company to in-line from outperform, citing cost concerns over programs such as the A380.

The broker said that the glitches could be due to management distraction caused by the current battle at the head of the company for the French CEO position. Goldman said that the key priority for the company should be "the restoration of management (and shareholder) unity and focus."

In addition, the broker said: "A380's first flight, likely in early February, remains a key catalyst. In our view, Airbus needs to adhere to this date given the higher-than-expected program costs." EADS owns 80 percent of Airbus Industries.

Vivendi Universal
V, +0.96%
(012777) shares initially dropped 0.2 percent after Deutsche Bank downgraded the company to hold from buy, saying it believes a major surprise in earnings per share will be difficult to achieve after good results earlier this year. But the shares recovered by the close of trade to finish up 0.3 percent.

Deutsche Bank said it believed Vivendi overpaid for the French soccer rights and would struggle to recover all the incremental costs. The broker also noted that the deal should not really hurt rival TPS and will not force it to the negotiating table near term "to consummate a merger of the satellite platforms."

Merrill Lynch said "while there is no denying that Vivendi has overpaid for these rights, we believe there is a strategic merit to exclusivity and that it is part of a three-step plan to force TPS into a merger."

Independent French television company TF1 (005490) added 2.4 percent after Bertrand Meheut, chairman of Vivendi's French pay-television broadcaster Canal Plus, said he backed the idea of a merger between CanalSatellite and rival TPS, according to a report in the Financial Times newspaper.

German utility company E.on
EON, +1.19%
(761440) added 1.3 percent after Dresdner Kleinwort Wasserstein upgraded the company to buy from add. "Both E.on and RWE are immune to U.S. dollar weakness...due to their coal feedstocks being priced in U.S. dollars, they are beneficiaries of current dollar weakness," the bank said in a note to investors.

Deutsche Bank downgraded German carmaker Volkswagen (766400) to sell from hold, saying the earnings profile of the group "continues to look sluggish." The broker said: "We assume that tougher market conditions will force Volkswagen to pass on more of its cost savings in 2005 than we originally thought." Deutsche Bank cut its price target on the carmaker to 28 euros from 32 euros and said stronger competition should also be expected from China. Volkswagen shares were 0.7 percent higher.

Stocks in focus

Bayer (575200)
BAY, -6.67%
shares gained 1.6 percent after the company said it has agreed to sell its plasma products business to NPS BioTherapeutics for 450 million euros ($590 million). The consideration of $590 million includes cash, a 10 percent equity interest in NPS BioTherapeutics, retention of selected working capital items and contingency payments of up to $60 million.

In Milan broadband communications player Fastweb (142356) slipped 0.25 percent after it announced it had hired bankers to advise it on the possibility of buying Italian telecoms carrier Wind. Fastweb has shaken-up the European telecoms market by offering customers television services in a triple-play deal of telecoms, television and Internet service. National carriers such as Deutsche Telekom (555750)
DT
and France Telecom (013330)
FTE, +0.11%
have followed suit.

Ericsson
ERICY
shares were 0.5 percent higher after it said Monday it has won a $805 million contract from Guangdong Mobile Communication Corp. to expand the carrier's GSM network in Guangdong Province, China.

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